The Chancellor Jeremy Hunt has announced a reform to the high income child benefit charge (HICBC) in his recent Spring Budget 2024. The threshold has increased to £60,000 from April 2024.
The rate at which HICBC is charged will also be halved. This means that it will not be fully withdrawn until individuals have an income of at least £80,000.
What is the purpose of the high income child benefit charge (HICBC)?
Child benefit was first introduced in 1977 in an effort to financially support parents with the costs that came with raising the next generation. It can be claimed if a parent is responsible for a child under 16 or under 20 in approved education or training. Child benefit is currently £24.00 per week for the first child and £15.90 per week for each additional child.
In 2013 rules came into force that considered the income of those parents, which meant the system was then fully means tested and higher paid parents were impacted with high income child benefit charges.
How is high income child benefit charge (HICBC) calculated?
Essentially, the HICBC charge is a type of tax system created to claw back child benefit if you or a partner had an adjusted net income of over £50,000 (pre April 2024).
As confirmed by the government, an adjusted net income is calculated by total taxable income minus certain tax reliefs, for example: trading losses (for the self-employed), Gift Aid charity donations, and pension contributions.[i]
Child benefit was then withdrawn by 1% per £100 over that adjusted net income threshold. That’s why when income reached £60,000, the child benefit was fully withdrawn.
This system is also based on an individual income basis. The fairness of the rulings surrounding this were argued by many, for example, on the individual basis, a couple could earn just under the £50,000 threshold each and still receive full benefits having a combined income of just under £100,000. However, someone earning £60,000 alone, with no other partner income, loses all child benefit. The single parent is more likely to feel the sting of the claw back and find financial struggle in this instance.
The new HICBC reform
The new reform has increased the HICBC threshold from £50,000 to £60,000 (as of April 6th 2024). HICBC will also be administered on a household rather than an individual basis by April 2026. The Chancellor has considered this a fairer regime, addressing the concerns of single parents. Consultation on this reform will begin in due course.
You (or your partner) will also only be charged 1% of every £200 you earn over £60,000 – so that child benefit is not fully withdrawn until individuals have an income of at least £80,000.
What this means for you
If you have not been claiming the allowance due to the highest earner’s income being more than £60,000 you should look at claiming the relief from April 2024.
If claiming, there is still a ‘tax trap’ for the parent with income between £60,000 and £80,000 but this is half what it was before. For example, someone with 3 children would have £2,902pa child benefit at £60,000 but none at £80,000. This creates an additional tax charge of 14.5% which means total tax of 54.5%.
Pension contributions can be used to reduce your adjusted net income to below the “high income” amount of £60,000 to reclaim this tax. It’s crucial that you speak to your financial planner before making any decisions on this matter.
It is also worth remembering that you get national insurance credits if you are claiming child benefit for a child aged under 12. So, even if it subject to the HICBC, it could be worth claiming and paying it back in tax for the credits.
If you would like to speak to our team of professional advisers about your personal circumstances, please do get in touch today.
